Memo To Bernie Sanders: You Can't Have Scandinavian Socialism Without Taxing The Middle Class

That Bernie Sanders would like to have Scandinavian style socialism for the United States doesn't bother me in the slightest. I might refer to the system those countries have as social democracy, not socialism, but that's just me being accurate in my use of language, not something that operates as a refutation of the basic idea. And it has to be said that those Nordics are pretty nice places to live. But it is necessary for people to understand how they do operate.

The most important part of how they operate being that they have vastly more regressive tax systems than the US does. Not just a little bit more regressive, the US has the most progressive tax system, by a long way, of any of the rich large nations. This is pretty much the same statement as you can't have that Scandinavian socialism without taxing the middle classes. Simply because there's no other group in society with enough money, in aggregate, to finance that sort of a welfare state.

Sorry, seriously, the rich just don't have that much money. At minimum you'd need to raise 10% of GDP, over and above current tax rates, to be able to finance all that social welfare. This can be done of course: but it can't be done by just taxing the rich. Yes, the American rich do get a very large part of all income. 20% and more of all income in fact. But if you're going to try and get 10% of GDP from that group then you need to take half of all of that from them. No, this doesn't mean marginal tax rates of 50% or whatever. It means average tax rates of 50%. And that's on top of the taxes that they're already paying. And whatever else you might think about soaking the rich they're simply not going to sit there and pay the taxes they currently do, plus another half of all their income. They'll change their behaviour, thus there just won't be that amount to tax over the long run.

So the only way to finance a Nordic economic model is with massive (and regressive) taxes on the middle class, because that’s where the money is.

There's two ways they do this. Yes, sure, income tax rates are higher. But that's not what brings the money rolling in. Those high rates apply at much, much, lower levels of income than the US taxes do. You might not think that someone earning $60,000 should be paying a 60% marginal income tax rate, I might not think so either, but that's the way the Danish system works. Someone on $30 an hour, someone in what we might consider to be a decent blue collar job, is paying the country's highest tax rate.

The other way is to have a national sales tax, a VAT in fact. This does raise 10% of GDP when set at 25%. But that is also quite obviously a tax upon the middle class. And those are really the only two ways you can do it.

No, corporate taxation, a financial transactions tax, import duties, these just aren't going to raise the sort of revenue needed. You can indeed have social democracy, Nordic socialism, if that's what you want. But you've got to tax the middle classes to pay for it: because only the bulk of the people in the country have enough money in aggregate to pay for it all.

Which is what makes the work of Lane Kenworthy so interesting. Might be worth tracking down a copy of his book of last year, Social Democratic America. Because he does desire that Nordic paradise for the US, as Bernie does. But he's also got the courage to tell us all how it will all have to be paid for. A massive tax rise on the middle class. This may or may not be something that you or I desire to happen: but it is, as Kenworthy says, the only way that it can be financed.

We do, of course, all look forward to Bernie himself telling us of the other side of his suggested public policy. Sure, the things we get bought for us all sound great: but how much are we going to have to pay for them?

I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. ...